PRI proposes framework for ESG investment

October 14, 2022

The tension between increasing positive sustainability investment impact while staying within the laws of different jurisdictions has been explored in a report by the Principles for Responsible Investment (PRI).

The study called ‘A Legal Framework for the Impact’ considered why many investors still remain hesitant to pursue positive environmental and social impacts through investments.

It found a revised approach by policymakers could help to remove barriers, in particular where they are relevant to financial returns.

Working alongside The United Nations Environment Programme Finance Initiative and The Generation Foundation, the United Nations-backed PRI commissioned what it describes as “ground-breaking legal analysis” to consider the global landscape in this area.

The collaboration commissioned Freshfields Bruckhaus Deringer to consider how existing legal frameworks in 11 jurisdictions enable investors to consider the impact of their activities within many of the world’s major economies.

They analysed data from the EU, Australia, Brazil, Canada, China, France, Japan, South Africa, the Netherlands, UK and the US.

Read Minerva's previous coverage sustainable investing:

https://www.old.manifest.co.uk/sdgs-will-fail-without-private-sector-alignment-sdsn-report/

The report included input from a Reference Group which included experts from investment firms who have sustainability impact considerations in their core strategies.

It found that after governments introduced a spate of policies in recent years to encourage responsible investment, investors have become increasingly aware that financial returns depend on the stability of social and environmental systems.

Some of the key conclusions were:

• financial return is generally regarded as the primary purpose for investors
• investors generally have a legal obligation to consider pursuing sustainability impact goals where that can help achieve their financial objectives
• in some circumstances, investors can pursue sustainability impact goals for reasons other than financial return
• investors are legally required to pursue improved sustainability impacts if the objective of the financial product commits them to doing so

Pulling out the UK as a case study, it found the British legal framework limits investors’ ability to pursue sustainability impact objectives as an ‘ultimate end’ in themselves, rather than for financial return.

The report recommends UK policy makers should switch their focus away from ensuring investors report how they manage ESG risks to investments, to instead placing more of an emphasis on the sustainability impacts of their investments.

It concludes that a new ‘bigger toolkit’ related to asset allocation, ambitious stewardship, and engagement with policy makers, will empower investors to better pursue sustainability goals.